May 4 (Bloomberg) -- Standard & Poor’s indicated that a
fiscal plan scheduled for next month by Prime Minister Yukio
Hatoyama’s government may be key to whether it will cut the
nation’s sovereign credit rating.

The proposal will be “an important statement of the
government’s commitment” to rein in the deficit, William Hess,
director of sovereign ratings for Asia, said in an interview
yesterday in Tashkent, Uzbekistan. “Something has to appear to
change our assessment for where things could end up.”

At stake for Japan is keeping the AA grade after S&P
lowered its outlook for the rating in January, and shoring up
confidence that it will avoid contagion from a Greek crisis
threatening to engulf other sovereign borrowers. Finance
Minister Naoto Kan said this week that Greece has shown the need
for Japan to take a “very firm” stance toward reducing debt,
which is approaching twice the size of Japan’s economy.

“There is a growing sense of urgency, even though it’s
stated very quietly, that the situation isn’t sustainable,”
said Hess, who was in the capital of Uzbekistan to attend an
annual meeting of the Asian Development Bank.

S&P downgraded Greece’s debt to junk, or below investment
grade, last week and followed with cuts to Portugal and Spain.
Greece secured an unprecedented 110 billion-euro ($145 billion)
bailout package from the European Union and International
Monetary Fund to prevent default this week.

Japan Plan

Hatoyama’s government, which faces an election in the upper
house of parliament in July, plans to roll out its medium-term
fiscal proposal next month. It’s considering targeting a budget
surplus or a reduction in the deficit to 3 percent of gross
domestic product by 2020 from a 9.4 percent shortfall this year,
a government official said on condition of anonymity last month.

“This will be a challenging year for the government to
provide a credible plan,” said Hess. “The outlook change
reflects the view of where things are headed.”

Japan’s government bonds have yet to signal evidence of
investor concern. Benchmark 10-year notes yielded 1.29 percent
at the end of last week, little changed from the start of the
year and the lowest level among major economies. Japan’s market,
unlike Greece, is almost solely composed of domestic investors,
with less than 7 percent of holders being foreign as of December.